How to make your retirement savings last: common myths debunked

When it comes to saving for retirement, making sure
your savings last is a common major concern. The best way to address this
concern is to know your risks and overcome them.

Shaun Duddy, product
development manager at Allan Gray, debunks common myths associated with
retirement savings to help investors overcome various risks.

Myth #1:
My savings will outlive me

“The simple truth is that many people will live a lot
longer than they expect,” asserts Duddy. “Based on our current understanding of
South African mortality statistics, around 30% of women who retire at age 65
will still be alive at the age of 90.”

He adds that this is a sobering reality for investors
who think that their savings will last beyond their living years.

Myth #2: I
only need to account for 6% inflation in my savings plan

“Although inflation has averaged about 6% over the
past ten years thanks to the inflation-targeting efforts of the Reserve Bank,
there have also been times, for example in the 1980s, when inflation has spiked
to 20%,” Duddy says.

Even at
6%, he believes inflation can have a big impact on investors’ standard of
living.

“Over 30 years, the buying power of R1 000 would be
eroded to the point that it only buys goods now costing less than R200, at an inflation
rate of 6%.”

He cautions investors who are ready to hang up their
work boots to ensure that they account for inflation in their retirement
planning, as inflation has a very real impact on the purchasing power of their
income.

“It is my understanding that of the guaranteed
annuities sold in SA today, most do not have inflation-related increases built
into them; a sobering reality,” he says.

Myth #3: I
can draw down more than 4% of capital

A starting income of 6% of capital may not seem like a
lot, but once you account for the fact that that income needs to keep up with
inflation for say 30 years, the minimum real (after inflation) return required
to ensure income sustainability is 5.5% per annum.

“The chances of achieving this level of return are
quite a lot lower than you would think. Looking back at very long-term asset
class returns doesn’t give a full perspective. While the average return that is
likely to be generated by your portfolio over time is important, it is also
very important to understand what your personal return experience in that
portfolio is likely to be: the ordering of your returns, volatility and the
timing of your withdrawals all influence your personal return outcome and
therefore the sustainability of your income,” Duddy cautions.

“The reality is that if you start income drawdowns at
more than 4% of your capital, the odds of sustainability are not in your
favour.”

Myth #4: I
can’t afford to take risks

Duddy
cautions against being too conservative when it comes to investing your
retirement savings.

“Our research suggests that you need a
well-diversified portfolio with at least 50 to 60% invested in growth assets,
such as shares,” he says. “This may mean you have to stomach some short-term
volatility, but if you invest only 30% in equity, it’s unlikely that your
retirement savings will last the distance.”

Duddy
sums up the three requirements to help you achieve a sustainable retirement
income:

1.
Calculate 4% of your capital value as a maximum starting income for the year.

2.
Increase the resultant rand value only by inflation every year.

3.
Invest at least 50 to 60% of your portfolio in equities for growth.

“If you follow this strategy, there is a strong
likelihood that your income will last for at least 30 years,” he
concludes.

Allan Gray will be
presenting at the Allan Gray Investment Summit in Cape Town and
Johannesburg on 17 July and 18 July 2018 respectively. To find out more,
visit www.investmentsummit.co.za.